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Why the CFO Thinks You Should Invest in Sirius XM Radio

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Sirius XM CFO David Frear outlines the reasons at this year's UBS Global Media and Communications Conference.

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MINYANVILLE ORIGINAL Invest in Sirius XM Radio (NASDAQ:SIRI) because of its strength in free cash flow (FCF) growth – was essentially the thesis of Sirius CFO David Frear.

Frear was was one of the many presenters on the first day of the UBS Global Media and Communications Conference held in New York City from Dec 3 to 5. He first introduced his company by pointing out that Sirius has "managed to carve out a pretty good share of the national radio market," with $3.4 billion in revenue estimated for 2012, which is about 18% of the overall radio market place. $3.4 billion, Frear highlights, is more than the 2012 revenue projections of rivals Clear Channel (PINK:CCMO) ($3.0 billion) and Pandora (NYSE:P) ($429 million).

In a complicated and crowed digital music ecosystem, with the likes of iTunes (NASDAQ:AAPL), Google Play (NASDAQ:GOOG), Rhapsody and Amazon MP3 (NASDAQ:AMZN), Frear believes that a subscription-based business model is significantly superior to an advertising-based business model because the former provides consistency in terms of long-term performance and predictability in terms of long-term cash flows.

With 23.4 million pay subscribers in the US as of the third quarter this year, Sirius is far ahead of Spotify (4 million), Pandora (1.2 million) and Rhapsody (1 million).

"We not only get more digital music subscribers, but they also pay us a lot more.," said Frear. "The numbers speak for themselves - Pandora monetizes at $5.84 per active user per year. ClearChannel, the clear leader in the analogue format of AM/FM radio, monetizes at a little than $12.55 per listener, and we do so at $137.69 per subscriber."

"What is driving our monetization rate? It's not music listening – we play the least amount music of anybody in the space, but we have the highest monetization rate. It's important to play music, but you've got to do something more. In today's world, free-to-consumer music listening is almost everywhere. Diversity of content, from music, news, talk to entertainment, is what sets us apart," explained Frear.

Sirius has also done a good job at retaining its large subscriber base. Its third-quarter monthly churn rate was a lowly 2%, which is better than HBO's (NYSE:TWX) and Netflix's (NASDAQ:NFLX) 4-5% average and comparable to DirecTV's (NASDAQ:DTV) 1.7% and Dish Network's (NASDAQ:DISH) 1.8%.

"For a long time, we've asked people to think about this business as having about a 70% contribution margin. The way we define that is the variable cost - our revenue share paid to auto companies and royalties paid to the music industry, customer service and billing costs, small line items for costs of equipment sold. If you look over the course of the last eight years, that's been consistently in the 70% range… [which] is a good marker for the company going forward.

One worry that investors have expressed about the Sirius XM is cost of growing its user base. For the third quarter this year, the company reported a 5% increase in subscriber acquisition costs.

However, Frear asserted that Sirius's subscriber acquisition costs is dominated by subsidies for new car installations. But the new cars sold with Sirius built into their systems six years ago are now entering the used car market, where Sirius can sell its product without having to provide an installation subsidy. There are only marketing costs.
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No positions in stocks mentioned.
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